I'm the environment editor at Forbes. Before joining Forbes in April 2011, I wrote about all things green and tech as a contributor to The New York Times, a senior editor at Fortune and an assistant managing editor at Business 2.0 magazine. I previously was the business editor at the San Jose Mercury News and during the (first) dot-com era served as a senior writer and senior editor at The Industry Standard (RIP).

Solyndra Raid: Is Failure A Crime?

The FBI’s early-morning raid Thursday on defunct California solar startup Solyndra underscores the disconnect between Washington and Silicon Valley and raises a bigger question: Is failure a crime?

The timing may or may not have been coincidental – the search for documents related to the company’s $535 million federal loan guarantee came hours before President Obama was to deliver a prime-time jobs speech before a joint session of Congress. (Department of Energy representatives accompanied the FBI agents; only a month ago Energy Department officials joined with Solyndra executives and investors in an 11th hour attempt to secure badly needed financing for the troubled startup, according to the company’s bankruptcy filings.)

Congressional Republicans have accused the administration of improperly favoring Solyndra to benefit George Kaiser, a Tulsa billionaire who was an Obama campaign contributor and a major investor in the company. The maker of a high-tech solar panels became the first beneficiary of the administration’s renewable energy loan guarantee program and its factories were a favored photo op for politicians like Obama, who made an appearance at the company last year, and former California Gov. Arnold Schwarzenegger.

The optics, as they like to say in D.C., don’t look good. Among the revelations Thursday was that Kaiser and Solyndra executives had made frequent visits to the White House over the past two years. Henry Waxman, the powerful Democratic congressman from Los Angeles, meanwhile released a July letter in which Solyndra chief executive Brian Harrison insisted that the startup was in fine financial shape. (Solyndra’s bankruptcy filings show that at the time the company was scrambling to secure new capital to survive.)

Whether any of this is illegal remains to be seen. But what does seem clear is that Washington appears to have misunderstood the nature of investing in high-risk, high-tech startups.

Certainly the venture capitalists and other investors who poured more than $1 billion into Solyndra understood the gamble they were taking on a startup with a new, expensive and commercially unproven photovoltaic technology introduced into a volatile solar market dependent on government subsidies. Failure does not necessarily mean fraud.

In this town, failure is always an option and Valley veterans wear their blowups proudly on the sleeves of their polo shirts (provided crash-and-burns are followed by resurrections elsewhere). Solyndra was not the first solar company to get sidelined by the rapid rise of low-cost, government-subsidized Chinese photovoltaic manufacturers and plummeting prices for photovoltaic panels and it won’t be the last.

Let’s keep in mind that Solyndra filed its loan guarantee application to build a $733 million solar panel factory during the George W. Bush administration and it was approved in the early months of the Obama administration. At the time, Solyndra had raised more than $600 million from investors – not chump change, even by Silicon Valley standards – and solar panels were already rolling off its first assembly line. Chinese companies had just started to enter the U.S. market and seemed a distant threat. (Within two years they would become the world’s biggest suppliers of solar panels, pushing prices down by more than 50%.)

The Obama administration has made bigger bets on other commercially unproven solar technologies, such as the $1.6 billion loan guarantee for BrightSource Energy’s solar thermal “power tower” plant now under construction in the California desert. And a $2.1 billion loan guarantee offer for Solar Millennium’s 1,000-megawatt Blythe solar trough plant was belatedly turned down when the rapidly changing economics of the solar market led the company to switch to photovoltaic panels for the project.

Maybe the lesson of the Solyndra debacle is this: Rather than placing bets on individual companies and technologies, Washington should stick to writing the rules of the road, creating the broad regulatory and market framework to level the playing field between renewable energy startups and fossil fuel-fired competitors that bear no cost for their contribution to global warming .

That would entail something like enacting a cap-and-trade market or a carbon tax, policies the Obama administration has shown little political will to pursue. And of course most of the Republican presidential candidates profess not to even believe in climate change.

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Don’t think its all bad news its simply the result of an industry starting to mature that needs to get its act together which sadly Solyndra did not.

The Chinese competition blame is not the whole story and is misleading and if they did not build this threat into their business plan that says very poor management and guides from the directors and board

Basic due diligence , which again should have been in the business plan, on its alleged competitive edges would have revealed that

Solyndra depended on

1. High Competitor Silicon prices to support Solydra’s expensive costs ( they have crashed and prices of any material always fluctuate why no game plan to offset this )

2. Modular flat roof installation design ( Now many manufactures do this , what was their plan when this was obviously going to happen. Construction installations of any type are a 0 productivity game in a brutally competitive market)

3. Government subsidies at all levels in all markets ( they are evaporating both in Europe and in the US and you can never base a solid long term business plan on a subsidy )

With premium prices at twice and three times industry norm for a product that only performed at 60% of its competitors it was a train wreck waiting to happen.

Most of the subsidies and investments seem to have gone into an expensive robotic plant that without a huge market for its product was in deep trouble to begin with. As many have found to their cost the building ( albeit the showiest and the most visible ) is only part of the product and never forget what you are really trying to do which in this case if it was compete with china’s cheap manufacturing using robots that’s suicidal but might make a great fiction novel . The legal fallout from client installations is also going to prove interesting

Political Hubris, before the fall, indeed and when the political establishment falls in love with an idea ( sic ) without a good ( constantly reviewed ) plan then the business types need to run for the exits.

I would suspect in the C11 review that the pressure to build the huge facility came from the gov backers who wanted a showpiece , and crank out stuff ,and that simply drained the cash from where it should have been deployed . ” the master plan ” if they had one.

Lets hope someone can sort out something from the lesson wreck ( tons of inventory that will be really cheap ) as the opportunities are boundless

You’re exactly right that Solyndra’s high manufacturing costs, particular rooftop technology and expectation that high polysilicon prices would give it an edge all contributed to its demise. For what it’s worth, Solyndra executives told me last year that the labor cost differences were negligible given the robots but it was the rapid fall in conventional PV module costs that were killing them.

It is is safe bet that the Justice Department would not have raided a firm well connected to Democratic Party circles if they did not think that it was not something more than just a “good go gone bad”.

The WSJ reports that “The raids were conducted at the behest of the Department of Energy’s inspector general…”

and that…

“In March 2010, the company disclosed that its external auditor had questioned whether it could survive.

In a special note, PricewaterhouseCoopers said the company ‘has suffered recurring losses from operations, negative cash flows since inception and has a net stockholders’ deficit that, among other factors, raise substantial doubt about its ability to continue as a going concern.’”

The likeliest reading of these facts are that fraud was committed. Fraud is not the same a failure. What the movie “The Producers”, it explains better than I ever could the difference between the two.

I’ve seen that PriceWaterHouseCoopers’ boilerplate in countless audits of tech companies. It’s a fact of startup life that most new tech companies are in the red, even those that have filed for IPOs. (BrightSource Energy, for instance.) Losing money isn’t necessarily a sign of fraud but of the losses often incurred in getting a capital-intensive renewable energy startup off the ground.

Very much enjoyed your thoughts. While the idea of propping up US manufacturers to be competitive in the solar space sounds like a good idea, the technology underpinning the business has to price relevant – I don’t see any reason why China won’t dominate PV for the years to come unless we see tariffs or legislation requiring a local partner. The US should enact the same laws and regulations that we experience in Canada, India, and China..etc.

I’ve got a copy of the Term Sheet for the loan. The problem with Solyndra is that at the time the term sheet was filed with the DOE (12/28/06) the cost of polysilicon was $400/kg and compared to that Solyndra had a chance. The problem is that by the time the loan was granted in 2009, polysilicon had dropped to $60/Kg which made regular solar panels cheap enough that Solyndra didn’t have a chance. But the DOE never asked for an updated Term Sheet and Solyndra execs took the money knowing that the economics for its competition had changed dramatically. It isn’t criminal but it’s not ethical.

Toyota and Honda received huge government funding in their early days as did many Japanese auto companies that ultimately did not make it.

The simple fact is that a regulatory framework is not enough to level the playing field between nascent industries and established players…because the big guys can always over-run the start-ups with a heavily funded supply chain, channels and marketing, regardless of the relative technical merits.

On-the-other-hand, if even one of the government’s wide-ranging ventures gets traction, many new players will come in on their own – accelerating new technology adoption by decades.

Agreed that US public investment should be in basic science, but doing this alone leaves it vulnerable to foreign commercialization…because other governments won’t stop at basic science.

Todd, I find it remarkable that a clear failure on the government’s part is a sign to you and others that more, but different, intervention is the fix. Bureaucrats are no better, and often much worse, in technology matters than private sector people. No one is perfect, so failure is assured at some pace either way. The rate of failure is the key. And while it may be a valid argument that the government’s failure rate may be more palatable in mature industries (automotive?), it is really bad in emerging markets.

I can easily rationalize government investment and activity in basic research, with NREL being a prime example. But it boggles my mind what stream of logic/reasoning must be required to decide bureaucrats in DC are equally (or more) competent at setting effective guidelines to “assure better success” versus letting the markets chart a more natural course.

In the engineering world, control systems are often put in a death spiral when the response to measurement deviations – or desired outcomes – are tighter restrictions on variables. I’m not an economist, but this “feels” like an analogous situation. More is not necessarily the answer to the failures of the past.

Just a personal view, but assigning blame on the Chinese or lack of sufficient market manipulation is a symptom of the failure. To me what is missing is a fundamental view of risk and the acceptance of unavoidable cronyism as a reason to minimize federal involvement at certain stages. For example, Kaiser’s investment risk was significantly different because the loss has huge personal and professional downsides. The government’s risk is negligible by comparison in most circumstances. A loss here or there is not on the radar of the nation with a budget of this size. This one may be the exception because of the history of such failures (e.g. Evergreen Solar) and the current distaste for waste and negligent spending.

It is true most startups fail and no crime was committed. However, it is possible that the founders knew there was little or no chance of success from the beginning and completely misled investors about the chance of success. Then they used the money to pay themselves excessive salaries and bonuses, spent excessive funds for expensive office furnishing, etc. Then, I would say that a crime was committed. I know nothing to suggest such was the case here other than a politician selling his office for political favor. Obama and his appointees have a misguided sense of green energy. They are ignoring that which works for blue (in this case, Green) sky. Solar panels, wind turbines and other so called green technoligy are not ready for the mass market. They may be the best solution in remote areas where electricial utilities are not available but they are not otherwse competitive.